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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2303920
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)
(972) 713-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant outstanding at April 29, 2003:
45,373,933
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
March, 31
------------------------
2003 2002
-------- --------
Revenues:
Software licenses $ 5,460 $ 5,314
Software services 7,706 4,992
Maintenance 10,935 9,315
Appraisal services 6,751 7,783
Hardware and other 1,473 1,518
-------- --------
Total revenues 32,325 28,922
Cost of revenues:
Software licenses 1,544 1,069
Software services and maintenance 13,282 11,510
Appraisal services 4,748 5,405
Hardware and other 1,107 1,204
-------- --------
Total cost of revenues 20,681 19,188
-------- --------
Gross profit 11,644 9,734
Selling, general and administrative expenses 9,101 7,895
Amortization of acquisition intangibles 785 834
-------- --------
Operating income 1,758 1,005
Realized gain on sale of investment in H.T.E., Inc. 23,233 -
Legal fees associated with investment in H.T.E., Inc. - (125)
Interest income 9 37
-------- --------
Income before income taxes 25,000 917
Income tax provision 7,704 355
-------- --------
Net income $ 17,296 $ 562
======== ========
Earnings per common share:
Basic $ 0.38 $ 0.01
======== ========
Diluted $ 0.36 $ 0.01
======== ========
Weighted average common shares outstanding:
Basic 45,951 47,386
======== ========
Diluted 47,738 49,725
======== ========
See accompanying notes.
1
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
March 31,
2003 December 31,
(Unaudited) 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 30,044 $ 13,744
Short-term investments 15,001 -
Accounts receivable (less allowance for losses
of $782 in 2003 and $690 in 2002) 33,522 33,510
Prepaid expenses and other current assets 3,829 4,009
Deferred income taxes 1,197 1,197
--------- ---------
Total current assets 83,593 52,460
Property and equipment, net 6,595 6,819
Other assets:
Investment in H.T.E., Inc. - 27,196
Goodwill 46,298 46,298
Software, net 22,375 21,933
Customer base and other acquisition intangibles, net 14,431 14,655
Sundry 297 484
--------- ---------
$ 173,589 $ 169,845
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,851 $ 2,390
Accrued liabilities and other current liabilities 8,617 11,186
Net current liabilities of discontinued operations 405 442
Income taxes payable 7,531 -
Deferred revenue 25,482 26,208
--------- ---------
Total current liabilities 43,886 40,226
Long-term obligations, less current portion - 2,550
Deferred income taxes 4,418 8,413
Commitments and contingencies
Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 100,000,000 shares
authorized; 48,147,969 shares issued 481 481
Additional paid-in capital 156,828 156,898
Accumulated deficit (23,658) (40,954)
Accumulated other comprehensive income -
unrealized gain on security
available-for-sale, net of income taxes - 7,418
Treasury stock, at cost: 2,774,036 shares in 2003
and 1,928,636 shares in 2002 (8,366) (5,187)
--------- ---------
Total shareholders' equity 125,285 118,656
--------- ---------
$ 173,589 $ 169,845
========= =========
See accompanying notes.
2
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended March 31,
----------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 17,296 $ 562
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,154 2,092
Realized gain on sale of investment in H.T.E., Inc. (23,233) -
Discontinued operations - non-cash charges and
changes in operating assets and liabilities (37) (48)
Changes in operating assets and liabilities, exclusive of
effects of discontinued operations 3,925 (413)
-------- --------
Net cash provided by operating activities 105 2,193
-------- --------
Cash flows from investing activities:
Proceeds from sale of investment in H.T.E., Inc. 39,333 -
Purchase of short-term investments (15,001) -
Software development costs (1,782) (1,539)
Additions to property and equipment (319) (665)
Proceeds from sale of assets of discontinued operations - 800
Other (126) 1
-------- --------
Net cash provided (used) by investing activities 22,105 (1,403)
-------- --------
Cash flows from financing activities:
Purchase of treasury shares (3,298) -
Payments on notes payable (2,662) (36)
Payments on discontinued operations debt - (74)
Proceeds from exercise of stock options 50 1,365
Other - (127)
-------- --------
Net cash (used) provided by financing activities (5,910) 1,128
-------- --------
Net increase in cash and cash equivalents 16,300 1,918
Cash and cash equivalents at beginning of period 13,744 5,271
-------- --------
Cash and cash equivalents at end of period $ 30,044 $ 7,189
======== ========
See accompanying notes.
3
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed consolidated financial statements
following the requirements of the Securities and Exchange Commission and
accounting principles generally accepted in the United States, or GAAP, for
interim reporting. As permitted under those rules, certain footnotes or
other financial information that are normally required by GAAP can be
condensed or omitted for interim periods. Balance sheet amounts are as of
March 31, 2003 and December 31, 2002 and operating result amounts are for
the three months ended March 31, 2003 and 2002 and include all normal and
recurring adjustments that we considered necessary for the fair summarized
presentation of our financial position and operating results. As these are
condensed financial statements, one should also read the financial
statements and notes included in our latest Form 10-K for the year ended
December 31, 2002. Revenues, expenses, assets and liabilities can vary
during each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full year.
Although we have a number of operating subsidiaries, separate segment data
has not been presented as they meet the criteria set forth in SFAS
(Statement of Financial Accounting Standards) No. 131, "Disclosures About
Segments of an Enterprise and Related Information" to be presented as one
segment.
In addition, certain other amounts for the previous year have been
reclassified to conform to the current year presentation.
(2) Discontinued Operations
Discontinued operations includes our former information and property records
services segment for which our Board of Directors approved a formal plan of
disposal in December 2000 and two non-operating subsidiaries related to a
formerly owned subsidiary that we sold in December 1995. The business units
within the information and property records services segment were sold in
2000 and 2001. In March 2002, we renegotiated the proceeds from a May 2001
sale transaction and received cash of approximately $800,000 and a
subordinated note receivable amounting to $200,000 to fully settle a
promissory note and other contingent consideration in connection with the
original sale transaction. In our opinion and based upon information
available at this time, we believe that our remaining net liabilities
related to discontinued operations are adequate.
One of our non-operating subsidiaries is involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. See Note 10 -- Commitments and
Contingencies.
(3) Cash, Cash Equivalents and Short-term Investments
Cash equivalents include items almost as liquid as cash, such as money
market investments and certificates of deposits with insignificant interest
rate risk and original maturities of three months or less at the time of
purchase. For purposes of the statements of cash flows, we consider all
investments with original maturities of three months or less to be cash
equivalents.
Short-term investments include investments in short-term mutual corporate
and municipal bond funds. In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", we determine the
appropriate classification of debt and equity securities at the time of
purchase and re-evaluate the classification as of each balance sheet date.
At March 31, 2003, we classified these investments in bond funds as
available-for-sale securities pursuant to SFAS No. 115. Investments which
are classified as available-for-sale are recorded at fair value and
unrealized holding gains and losses, net of the related tax effect, if any,
are not reflected in earnings but are reported as a separate component of
other comprehensive income (loss) until realized. We made the initial mutual
fund investments of $15.0 million on March 28, 2003 and there were no
unrealized holding gains and losses as of March 31, 2003. Realized gains and
losses are determined on the specific identification method and are
reflected in income. Other than the gain on the sale of our investment in
H.T.E., Inc. (see Note 4 -- Investment in H.T.E., Inc.) there were no other
realized gains or losses for the three months ended March 31, 2003.
4
(4) Investment in H.T.E., Inc.
On March 25, 2003, we received cash proceeds of $39.3 million in connection
with a transaction to sell all of our 5.6 million shares of H.T.E., Inc.
("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share,
pursuant to a Tender and Voting Agreement dated February 4, 2003. Our
original cost basis in the HTE shares was $15.8 million. After transaction
and other costs, we recorded a realized gross gain of $23.2 million ($16.2
million after income taxes of $7.0 million, including the utilization for
tax purposes and reduction in valuation allowance for accounting purposes
related to a capital loss carryforward amounting to $1.1 million on a tax
effected basis).
Our 5.6 million shares of HTE represented an ownership interest of
approximately 35%. Under GAAP a 20% investment in the voting stock of
another company creates the presumption that the investor has significant
influence over the operating and financial policies of that company, unless
there is evidence to the contrary. As disclosed in our previous filings,
Tyler's management concluded that no such influence existed. Thus, we
accounted for our investment in HTE pursuant to the provisions of SFAS No.
115. Accordingly, our investment in HTE was previously classified as an
available-for-sale security. As of December 31, 2002, we had an unrealized
holding gain of $11.4 million ($7.4 million after income tax of $4.0
million), which was included in other comprehensive income.
(5) Shareholders' Equity
In August 2002, our Board of Directors approved a plan to repurchase up to
1.0 million shares of our common stock. During the three months ended March
31, 2003, we repurchased 875,200 shares for an aggregate purchase price of
$3.3 million.
On April 14, 2003, we commenced a modified "Dutch Auction" tender offer to
purchase up to 4.2 million shares of our common stock at a price per share
of $3.60 to $4.00. The aggregate costs of the transaction will be
approximately $17.0 million, including all estimated fees and expenses, if
we purchase 4.2 million shares at the maximum price. We will pay for shares
tendered in the offer with existing cash balances. The tender offer expires
on May 12, 2003 unless we choose to extend the offer.
(6) Income Tax Provision
For the three months ended March 31, 2003, we had an income tax provision of
$7.7 million, which included $7.0 million (after utilization of a capital
loss carryforward amounting to $1.1 million on a tax effected basis) related
to the realized gain from the sale of our investment in HTE. See Note 4 --
Investment in H.T.E., Inc. We had an effective income tax rate of 30.8% for
the three months ended March 31, 2003 compared to an effective income tax
rate of 38.7% for the three months ended March 31, 2002. The effective
income tax rates are estimated based on projected pre-tax income for the
entire fiscal year and the resulting amount of income taxes. The effective
income tax rates for the periods presented were different from the statutory
United States federal income tax rate of 35% primarily due to the
utilization of the capital loss carryforward in 2003, state income taxes and
non-deductible meals and entertainment costs.
5
(7) Earnings Per Share
The following table details the reconciliation from basic earnings per share
to diluted earnings per share:
Three months ended
March 31,
-------------------
2003 2002
------- -------
Numerator for basic and diluted earnings per share:
Net income ...................................... $17,296 $ 562
======= =======
Denominator:
Weighted-average basic common shares outstanding .... 45,951 47,386
Assumed conversion of dilutive securities:
Employee stock options ........................ 1,089 1,413
Warrants ...................................... 698 926
------- -------
Potentially dilutive common shares .................. 1,787 2,339
------- -------
Weighted-average common shares outstanding,
assuming full dilution .............................. 47,738 49,725
======= =======
Basic earnings per share ............................ $ 0.38 $ 0.01
======= =======
Diluted earnings per share .......................... $ 0.36 $ 0.01
======= =======
We did not include certain options to purchase shares of common stock in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive as follows:
March 31, 2003............................... 1,927
March 31, 2002............................... 1,480
(8) Stock Compensation
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
we elected to account for our stock-based compensation under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," as amended and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB Opinion No. 25, issued in March
2000. In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" was issued to amend SFAS No. 123.
This statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Accordingly, under APB No.
25's intrinsic value method, compensation expense is determined on the
measurement date; that is, the first date on which both the number of shares
the option holder is entitled to receive, and the exercise price, if any,
are known. Compensation expense, if any, is measured based on the award's
intrinsic value -- the excess of the market price of the stock over the
exercise price on the measurement date. The exercise price of all of our
stock options granted equals the market price on the measurement date.
Therefore we have not recorded any compensation expense related to grants of
stock options.
6
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after December 31, 1994, as if
we had accounted for our stock-based awards to employees under the fair
value method of SFAS No. 123, and is as follows:
Three months ended March 31,
-----------------------------
2003 2002
------- -------
Net income ......................................................... $17,296 $ 562
Add stock-based employee compensation cost included in net income,
net of related tax benefit ..................................... -- --
Deduct total stock-based employee compensation expense
determined under fair-value-based method for all rewards, net
of related tax benefit ............................................. 456 459
------- -------
Pro forma net income ............................................... $16,840 $ 103
======= =======
Pro forma net income per basic share ............................... $ 0.37 $ 0.00
======= =======
Pro forma net income per diluted share ............................. $ 0.35 $ 0.00
======= =======
(9) Comprehensive Income
The components of comprehensive income are as follows:
Three months ended March 31,
----------------------------
2003 2002
-------- --------
Net income ......................................................... $ 17,296 $ 562
Other comprehensive income:
Reclassification adjustment for unrealized gain related to
investment in H.T.E., Inc. (net of deferred tax expense
of $3,995) ...................................................... (7,418) --
Change in fair value of investment in H.T.E., Inc. (net of
deferred tax expense of $3,818) ................................ -- 11,634
-------- --------
Total comprehensive income ......................................... $ 9,878 $ 12,196
======== ========
(10)Commitments and Contingencies
One of our non-operating subsidiaries, Swan Transportation Company ("Swan"),
has been and is currently involved in various claims raised by hundreds of
former employees of a foundry that was once owned by an affiliate of Swan
and Tyler. These claims are for alleged work related injuries and physical
conditions resulting from alleged exposure to silica, asbestos, and/or
related industrial dusts during the plaintiff's employment at the foundry.
We sold the operating assets of the foundry on December 1, 1995. As a
non-operating subsidiary of Tyler, the assets of Swan consist primarily of
various insurance policies issued to Swan during the relevant time periods
and restricted cash of $894,000 at March 31, 2003. Swan tendered the defense
and indemnity obligations arising from these claims to its insurance
carriers, who, prior to December 20, 2001, entered into settlement
agreements with approximately 275 of the plaintiffs, each of whom agreed to
release Swan, Tyler, and its subsidiaries and affiliates from all such
claims in exchange for payments made by the insurance carriers.
On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The bankruptcy filing by Swan was the result of extensive
negotiations between Tyler, Swan, their respective insurance carriers, and
an ad hoc committee of plaintiff attorneys representing substantially all of
the then known plaintiffs. Swan filed its plan of reorganization in February
2002. The principal features of the plan of reorganization include: (a) the
creation of a trust, which is to be funded principally by fifteen insurance
carriers pursuant to certain settlement agreements executed pre-petition
between Swan, Tyler, and such carriers; (b) the implementation of a claims
resolution procedure pursuant to which all present and future claimants may
assert claims against such trust for alleged injuries; (c) the issuance of
certain injunctions under the federal bankruptcy laws requiring any such
claims to be asserted against the trust and barring such claims from being
asserted, either now or in the future, against Swan, Tyler, all of Tyler's
affected affiliates, and the insurers participating in the funding of the
trust; and (d) the full and final release of each of Swan, Tyler, all of
Tyler's affected affiliates, and the insurers participating in the funding
of the trust from any and all claims associated with the once-owned foundry
by all claimants that assert a claim against, and receive compensation from,
the trust.
7
The confirmation hearings on Swan's plan of reorganization were held on
December 9, 2002. The plan of reorganization received the affirmative vote
of approximately 99% of the total votes cast. All objections to the plan
were resolved prior to the confirmation hearing, and the final confirmation
order will therefore not be subject to appeal. The confirmation order will
discharge, release, and extinguish all of the foundry-related obligations
and liabilities of Tyler, Swan, their affected affiliates, and the insurers
participating in the funding of the trust. Further, the confirmation order
will include the issuance of injunctions that channel all present and future
foundry-related claims into the trust and forever bar any such claims from
being asserted, either now or in the future, against Swan, Tyler, their
affected affiliates, and the participating insurers. In order to receive the
benefits described above, we have agreed, among other things, to transfer
all of the capital stock of Swan to the trust (net assets of Swan at March
31, 2003 were $309,000) so that the trust can directly pursue claims against
insurers who have not participated in the funding of the trust. In addition,
we have agreed to contribute $1.5 million in cash to the trust, which is due
as follows: $750,000 within ten days of the confirmation order becoming a
final order; $500,000 on the first anniversary of the date the confirmation
order becomes a final order; and $250,000 on the second anniversary of the
date the confirmation order becomes a final order. The confirmation order
for the plan of reorganization was filed with the United States Bankruptcy
Court for the District of Delaware on April 30, 2003. The confirmation order
will become a final order thirty days after execution by both the bankruptcy
and district court judges, which is expected to occur by the end of the
second quarter of 2003.
Other than ordinary course, routine litigation incidental to our business
and except as described herein, there are no material legal proceedings
pending to which we or our subsidiaries are parties or to which any of our
properties are subject.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The statements in this discussion that are not historical statements are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements about our business, financial condition, business strategy, plans
and the objectives of our management, and future prospects. In addition, we
have made in the past and may make in the future other written or oral
forward-looking statements, including statements regarding future operating
performance, short- and long-term revenue and earnings growth, the timing of
the revenue and earnings impact for new contracts, backlog, the value of new
contract signings, business pipeline, and industry growth rates and our
performance relative thereto. Any forward-looking statements may rely on a
number of assumptions concerning future events and be subject to a number of
uncertainties and other factors, many of which are outside our control,
which could cause actual results to differ materially from such statements.
These include, but are not limited to: our ability to improve productivity
and achieve synergies from acquired businesses; technological risks
associated with the development of new products and the enhancement of
existing products; changes in the budgets and regulating environments of our
government customers; competition in the industry in which we conduct
business and the impact of competition on pricing, revenues and margins;
with respect to customer contracts accounted for under the
percentage-of-completion method of accounting, the performance of such
contracts in accordance with our cost and revenue estimates; our ability to
maintain health and other insurance coverage and capacity due to changes in
the insurance market and the impact of increasing insurance costs on the
results of operations; the costs to attract and retain qualified personnel,
changes in product demand, the availability of products, economic
conditions, changes in tax risks and other risks indicated in our filings
with the Securities and Exchange Commission. The factors described in this
paragraph and other factors that may affect Tyler, its management or future
financial results, as and when applicable, are discussed in Tyler's filings
with the Securities and Exchange Commission, on its Form 10-K for the year
ended December 31, 2002. Except to the extent required by law, we are not
obligated to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise. When used in this
Quarterly Report, the words "believes," "plans," "estimates," "expects,"
"anticipates," "intends," "continue," "may," "will," "should", "projects",
"forecast", "might", "could" or the negative of such terms and similar
expressions as they relate to Tyler or our management are intended to
identify forward-looking statements.
GENERAL
Tyler provides integrated software systems and related services for local
governments. We develop and market a broad line of software products and
services to address the information technology (IT) needs of cities,
counties, schools and other local government entities. We provide
professional IT services to our customers, including software and hardware
installation, data conversion, training and product modifications, along
with continuing maintenance and support for customers using our systems. We
also provide property appraisal outsourcing services for taxing
jurisdictions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements.
These condensed consolidated financial statements have been prepared
following the requirements of accounting principles generally accepted in
the United States (GAAP) for interim periods and require us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition and intangible assets and
goodwill. As these are condensed financial statements, one should also read
our Form 10-K for the year ended December 31, 2002 regarding expanded
information about our critical accounting policies and estimates.
9
ANALYSIS OF RESULTS OF OPERATIONS
The following table sets forth items from our unaudited condensed
consolidated financial statements and the percentage change in the amounts
between the periods presented. The amounts shown in the table are in
thousands, except per share data. Revenues and expenses can vary during each
quarter of the year. Therefore, the results and trends in these interim
financial statements may not be the same as those for the full year.
Three months ended March 31,
----------------------------------------------
2003 2002 % Change
-------------- -------------- --------------
Revenues:
Software licenses $ 5,460 $ 5,314 3%
Software services 7,706 4,992 54
Maintenance 10,935 9,315 17
Appraisal services 6,751 7,783 (13)
Hardware and other 1,473 1,518 (3)
-------- --------
Total revenues 32,325 28,922 12
Cost of revenues:
Software licenses 1,544 1,069 44
Software services and maintenance 13,282 11,510 15
Appraisal services 4,748 5,405 (12)
Hardware and other 1,107 1,204 (8)
-------- --------
Total cost of revenues 20,681 19,188 8
% of revenues 64.0% 66.3%
Gross profit 11,644 9,734 20
% of revenues 36.0% 33.7%
Selling, general and administrative expenses 9,101 7,895 15
% of revenues 28.2% 27.3%
Amortization of acquisition intangibles 785 834 (6)
-------- --------
Operating income 1,758 1,005 75
Realized gain on sale of investment in H.T.E., Inc. 23,233 -
Legal fees associated with investment in H.T.E., Inc. - (125)
Interest income 9 37
-------- --------
Income before income taxes 25,000 917
Income tax provision 7,704 355
-------- --------
Effective income tax rate 30.8% 38.7%
Net income $ 17,296 $ 562
======== ========
Diluted earnings per share $ 0.36 $ 0.01
======== ========
Cash flows provided by operating activities $ 105 $ 2,193
Cash, cash equivalents and
short-term investments at March 31 45,045 7,189
Capital expenditures:
Software development costs 1,782 1,539
Property and equipment 369 665
10
REVENUES
The following table compares the components of revenue as a percent of total
revenues for the periods presented:
Three months ended March 31,
--------------------------------
2003 2002
------------ ------------
Software licenses 16.9 % 18.4 %
Software services 23.8 17.3
Maintenance 33.8 32.2
Appraisal services 20.9 26.9
Hardware and other 4.6 5.2
------------ ------------
100.0 % 100.0 %
Software license revenues. For the three months ended March 31, 2003,
software license revenues increased $146,000, or 3%, compared to the same
period in 2002. In addition, the first quarter of 2003 was the sixth
consecutive quarter in which our software license revenues increased
compared to the same period in the prior year. Sales of our financial and
city solutions software products increased approximately $500,000 compared
to the prior year period mainly due to geographical expansion into the
Midwest and Western United States. The majority of this increase was offset
by a corresponding decline in real estate appraisal software products
compared to the prior year. Our real estate appraisal software license
volume varies from period to period dependent upon the special needs and
timing of our customers. Local government taxing entities normally
reappraise real properties from time to time to update values for tax
assessment purposes and to maintain equity in the taxing process. While
certain of these taxing jurisdictions contract with our real estate
appraisal division to perform these reappraisals, it is not always necessary
for the customer to purchase new software in order to process the
appraisals. In some cases, a customer may simply add smaller appraisal
software modules to enhance the functionality of its existing software.
Software services revenues. Software services revenues increased $2.7
million, or 54%, during the three months ended March 31, 2003, compared to
the same period in the prior year. The increase in software services
revenues was attributable to the following factors:
[ ] We recognized approximately $1.1 million for services performed in
the first quarter of 2003 under our $11.0 million contract with the
State of Minnesota to implement and install our Odyssey Case
Management system. We signed the contract in July 2002 and it
includes both software license and software services. To date, no
software license revenues have been recognized. Under this contract
we have recorded approximately $3.0 million of service revenue from
inception to March 2003. We expect to perform approximately 70% of
the implementation by late 2003. The remainder of the
implementation is expected to be performed after this year; and
[ ] During the three months ended March 31, 2003, software services
related to the implementation of our financial and city solutions
software products increased by approximately $900,000. Software
services related to the implementation of our real estate appraisal
software also increased over the prior year period due to services
performed on several large software transactions which occurred
late in 2002. Typically, contracts for software licenses include
services such as installation of the software, converting the
customers' data to be compatible with the software and training
customer personnel to use the software.
Maintenance revenues. Maintenance revenues for the three months ended March
31, 2003 increased $1.6 million, or 17%, compared to the same prior year
period. We provide maintenance and support services for our software
products, third party software and hardware. The maintenance revenue
increase was due to growth in our installed customer base and slightly
higher rates on certain product lines.
Appraisal services revenues. For the three months ended March 31, 2003,
appraisal services revenues decreased $1.0 million, or 13%, compared to the
same period of 2002. The decrease is the result of the completion of our
contract with the Nassau County, New York Board of Assessors ("Nassau
County"). In the three months ended March 31, 2002, we recognized
approximately $2.5 million of appraisal services revenues related to Nassau
County. Because of the completion of the contract, we had no comparable
revenues during the three months ended March 31, 2003. That decrease was
offset somewhat by the recognition of approximately
11
$2.6 million for services performed during the first quarter of 2003 under
our appraisal contract with Lake County, Indiana, which was awarded in
December 2001. The Lake County contract to provide professional services and
technology to reassess real property in Lake County is valued at
approximately $15.9 million, of which $15.2 million relates to appraisal
services, and we expect to complete the contract by late 2003. We recognized
appraisal services revenues of approximately $855,000 related to the Lake
County contract during the first quarter of 2002 and $11.5 million since the
inception of the contract. In March 2003 we signed a new six-year, $28.0
million contract to provide Nassau County with updated property assessments
and additional real estate appraisal software.
COST OF REVENUES
Cost of software license revenues. For the three months ended March 31,
2003, cost of software license revenues increased $475,000, or 44%, compared
to the prior year period. During 2002, we had several products in the
development stage, which were released throughout the year. Once a product
is released, we begin to expense the costs associated with the development
over the estimated useful life of the product. Development costs consist
mainly of personnel costs, such as salary and benefits paid to our
developers, rent for related office space and capitalized interest costs.
Cost of software service and maintenance revenues. For three months ended
March 31, 2003, cost of software services and maintenance revenues increased
$1.8 million, or 15%, compared to the same period of 2002. These increases
are consistent with the higher professional services and maintenance
revenues for the same period, although software services and maintenance
revenues grew at a higher rate than the cost of those revenues, which is
reflective of more efficient utilization of our support and maintenance
staff and economies of scale. As a percentage of related revenues, cost of
software services and maintenance was 71% for the first quarter of 2003
compared to 80% for the first quarter of 2002.
Cost of appraisal services revenues. Costs of appraisal services revenues
decreased $657,000, or 12%, for the three months ended March 31, 2003,
compared to the same prior year period. The decrease is consistent with the
decrease in appraisal services revenues, which declined 13%. We often hire
temporary employees to assist in appraisal projects whose term of employment
generally ends with the projects' completion. As a percentage of related
revenues, cost of appraisal services was 70% for the first quarter of 2003
compared to 69% for the first quarter of 2002.
GROSS MARGIN
For the three months ended March 31, 2003 and 2002, our overall gross margin
was 36% and 34%, respectively. The improvement in our gross margin was
mainly due to higher software services and maintenance revenues without a
corresponding increase in personnel costs reflecting a more efficient
utilization of our support and maintenance staff and economies of scale.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, or SG&A, increased $1.2
million, or 15%, for the three months ended March 31, 2003, compared to the
same period in the prior year, primarily as a result of increased revenue.
For the first quarter of 2003, SG&A as a percent of revenue increased to 28%
from 27% for the same prior year period. The increase in SG&A as a
percentage of revenue is related primarily to higher health and other
insurance expenses, annual salary increases, and slightly higher research
and development costs.
AMORTIZATION OF ACQUISITION INTANGIBLES
For the three months ended March 31, 2003, amortization of acquisition
intangibles was approximately $785,000, compared to $834,000 for the same
period in 2002. The decrease in amortization from the prior year is related
to certain of our acquisition intangibles becoming fully amortized during
the first quarter of 2003. Acquisition intangibles are composed of the
excess of the purchase price over the fair value of net tangible assets
acquired that is allocated to acquired and amortizable software and customer
base with the remainder allocated to goodwill which is not subject to
amortization. The extended useful lives of these amortizable intangibles are
5 years and 20 to 25 years, respectively.
12
REALIZED GAIN ON SALE OF INVESTMENT IN H.T.E., INC.
On March 25, 2003, we received cash proceeds of $39.3 million in connection
with a transaction to sell all of our 5.6 million shares of H.T.E., Inc.
("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share.
Our original cost basis in the HTE shares was $15.8 million. After
transaction and other costs, we recorded a gross realized gain of $23.2
million ($16.2 million or $0.34 per diluted share after income taxes of $7.0
million). See Note 4 in the Notes to the Condensed Consolidated Financial
Statements.
LEGAL FEES ASSOCIATED WITH INVESTMENT IN H.T.E., INC.
During the three months ended March 31, 2002, we incurred approximately
$125,000 of legal and other costs associated with legal matters concerning
various tort claims HTE alleged against us and HTE's attempted redemption of
our 5.6 million shares for $1.30 per share. In September 2002, HTE released
us from all tort claims and a court declared HTE's reported redemption of
our shares was invalid. In March 2003, we sold for cash our entire
investment in HTE for $7.00 per share.
INCOME TAX PROVISION
For the three months ended March 31, 2003, we had an income tax provision of
$7.7 million, which included $7.0 million (after reduction in valuation
allowance related to the utilization of a capital loss carryforward
amounting to $1.1 million on a tax effected basis) relating to the realized
gain from the sale of our investment in HTE, Inc. We had an effective
income tax rate of 30.8% for the three months ended March 31, 2003 compared
to an effective income tax rate of 38.7% for the three months ended March
31, 2002. The effective income tax rates are estimated based on projected
pre-tax income for the entire fiscal year and the resulting amount of income
taxes. The effective income tax rates for the periods presented were
different from the statutory United States federal income tax rate of 35%
primarily due to the utilization of the capital loss carryforward in 2003,
state income taxes and non-deductible meals and entertainment costs.
NET INCOME
Net income was $17.3 million in the three months ended March 31, 2003,
including a $16.2 million realized gain after income taxes relating to the
sale of our investment in HTE. This compares to net income of $562,000 in
the three months ended March 31, 2002. For the quarter ended March 31, 2003
and 2002, diluted earnings per share was $0.36 and $0.01, respectively.
Diluted earnings per share for the three months ended March 31, 2003
included $0.34 per share related to our net realized gain on the sale of our
investment in HTE.
FINANCIAL CONDITION AND LIQUIDITY
On March 5, 2002, we entered into a new $10.0 million revolving credit
agreement with a bank, which matures January 1, 2005. Our borrowings are
limited to 80% of eligible accounts receivable and interest is charged at
either the prime rate or at the London Interbank Offered Rate plus a margin
of 3%. The credit agreement is secured by our personal property and the
common stock of our operating subsidiaries. The credit agreement is also
guaranteed by our operating subsidiaries. In addition, the credit agreement
requires us to maintain certain financial ratios and other financial
conditions and prohibits us from making certain investments, advances, cash
dividends or loans.
As of March 31, 2003, our bank has issued outstanding letters of credit
totaling $5.0 million under our credit agreement to secure performance bonds
required by some of our customer contracts. Our borrowing base under the
credit agreement is limited by the amount of eligible receivables and was
reduced by the letters of credit at March 31, 2003. At March 31, 2003, we
had no outstanding bank borrowings under the credit agreement and had an
available borrowing base of $5.0 million.
As of March 31, 2003, our balance in cash and cash equivalents was $30.0
million and we had short-term investments of $15.0 million, compared to a
cash balance of $13.7 million at December 31, 2002. Cash and short-term
investments increased primarily due to the $39.3 million cash received as
consideration in connection with the transaction to sell our 5.6 million
shares of HTE common stock to SunGard Data Systems Inc. Another factor
affecting our cash balance for the three months ended March 31, 2003 was
improved cash collections. At March 31, 2003, our day's sales outstanding
("DSO's") (accounts receivable divided by the quotient of annualized
quarterly revenues divided by 360 days) were 93 compared to DSO's of 99 at
March 31, 2002.
13
On March 28, 2003, we purchased $15.0 million of short-term investments. The
investments are principally low-risk funds that consist primarily of
short-term mutual corporate and municipal bond funds. The interest and
capital gains generated from these investments were re-invested in the
funds. For the first three months of 2003, the interest and capital gains
were immaterial.
On March 28, 2003, we retired an outstanding $2.5 million promissory note
payable. The note was due in January 2005 and paid interest quarterly at an
annual rate of 10%.
At March 31, 2003, our capitalization consisted entirely of $125.3 million
of shareholders' equity since we have no long-term debt outstanding at March
31, 2003.
During the first three months of 2003, we made capital expenditures of $2.1
million, including $1.8 million for software development costs. The other
expenditures related to computer equipment and expansions related to
internal growth. Capital expenditures were funded from cash generated from
operations.
During the three months ended March 31, 2003, we repurchased 875,200 shares
for an aggregate purchase price of $3.3 million in accordance with a plan
approved by our Board of Directors to repurchase up to 1.0 million of our
common stock.
On April 14, 2003, we commenced a modified "Dutch Auction" tender offer to
purchase up to 4.2 million shares of our common stock at a price per share
of $3.60 to $4.00. The aggregate costs of the transaction will be
approximately $17.0 million, including all estimated fees and expenses, if
we purchase 4.2 million shares at the maximum price. We will pay for shares
tendered in the offer with existing cash balances. The tender offer expires
on May 12, 2003 unless we chose to extend the offer.
As part of the plan of reorganization of Swan Transportation Company, one of
our non-operating subsidiaries, we have agreed to contribute approximately
$1.5 million over the next three years to a trust that was set up as a part
of the reorganization. See Note 10 in the Notes to the Condensed
Consolidated Financial Statements. We expect to pay $750,000 of the $1.5
million by the end of the second quarter of 2003. The remaining amounts will
be paid over the two subsequent years.
Absent acquisitions, we believe our current cash balances and expected
future cash flows from operations will be sufficient to meet our anticipated
cash needs for working capital, capital expenditures and other activities
through the next twelve months. If operating cash flows are not sufficient
to meet our needs, we may borrow under our credit agreement.
Item 4. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
the filing date of this quarterly report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate
and designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within
those entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent
to the Evaluation Date.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements --
"Commitments and Contingencies" on page 7 of this document.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 4.9 Third Amendment to Credit Agreement, Second Amendment
to Pledge and Security Agreement, Lender's Consent
and Waiver, and Borrower's Acknowledgement, by and
between Tyler Technologies, Inc. and Bank of Texas,
N.A. dated effective January 10, 2003.
(b) Exhibit 4.10 Fourth Amendment to Credit Agreement, and Lender's
Consent, by and between Tyler Technologies, Inc. and
Bank of Texas, N.A. dated effective March 27, 2003.
(c) Exhibit 4.11 Fifth Amendment to Credit Agreement and Lender's
Consent and Waiver, by and between Tyler
Technologies, Inc. and Bank of Texas, N.A. dated
effective March 31, 2003.
(d) Exhibit 99 Certifications Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
(e) Reports on Form 8-K filed during the three months ended March 31, 2003:
Form 8-K Item
Reported Date Reported Exhibits Filed
------------- -------- --------------------------------------------
2/5/03 5 We entered into a Tender and Voting
agreement with SunGard Data Systems, Inc.
("SunGard"), under which we agreed to sell
our investment in H.T.E., Inc. to SunGard
3/3/03 5 News release issued by Tyler Technologies,
Inc. dated August 19, 2002 announcing our
operating results for the year ended
December 31, 2002
3/26/03 2 We received the proceeds to complete the
sale of our investment in H.T.E., Inc. to
SunGard on March 25, 2003
Item 3 of Part I and Items 2, 3, 4 and 5 of Part II were not applicable and have
been omitted.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TYLER TECHNOLOGIES, INC.
By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial
Officer (principal financial officer
and an authorized signatory)
By: /s/ Terri L. Alford
--------------------
Terri L. Alford
Controller
(principal accounting officer and an
authorized signatory)
Date: May 2, 2003
16
CERTIFICATIONS
I, John M. Yeaman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tyler
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 2, 2003 By: /s/ John M. Yeaman
------------------
John M. Yeaman
President and Chief Executive Officer
17
I, Theodore L. Bathurst, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tyler
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 2, 2003 By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer
18
EXHIBIT INDEX
Exhibit 4.9 Third Amendment to Credit Agreement, Second Amendment
to Pledge and Security Agreement, Lender's Consent
and Waiver, and Borrower's Acknowledgement, by and
between Tyler Technologies, Inc. and Bank of Texas,
N.A. dated effective January 10, 2003.
Exhibit 4.10 Fourth Amendment to Credit Agreement, and Lender's
Consent, by and between Tyler Technologies, Inc. and
Bank of Texas, N.A. dated effective March 27, 2003.
Exhibit 4.11 Fifth Amendment to Credit Agreement and Lender's
Consent and Waiver, by and between Tyler Technologies, Inc.
and Bank of Texas, N.A. dated effective March 31, 2003.
Exhibit 99.1 Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
Exhibit 99.2 Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code